SUB PRIME EDUCATION
The clamor is getting louder for the federal government to “fix” the sub-prime loan problem. Somehow an arm of the government is to order mortgage companies to extend the introductory rates. That such a solution is even discussed is an example of how poorly our populace is educated in economics.
A co-worker told me about a report on TV saying that minorities were sold a greater percentage of sub prime loans, proving that corporations are not only evil but racist. Sub prime loans were created in the first place because companies were coming under fire for not loaning to minorities. The lower introductory payments qualify more people and thus make the numbers look better.
The other result of these loan packages was that everyone could suddenly afford a bigger house up front. And since mortgage brokers and realtors make their commissions as a percentage of the contract price, the two most influential professionals in home sales were pushing their customers down that road. The up-front commission structure for salesmen created an incentive for big loans. The salesman isn’t responsible for the re-payment. No CEO said lets start making bad loans. It happened as a result of the reward structure.
The real culprit in the sub prime fiasco, the real villain is the Department of Education. We pay bureaucrats billions to create an education policy in this country and kids graduate high school without the vaguest idea of why sub-prime loans are risky. Why are we sending kids to school for 13 years on the dime of the tax payer and not teaching them about dimes?
The main reason is that schooling has become a form of social policy, trying to shape society through the minds of the young rather than teaching practicality. A secondary reason is that the education bureaucrats see the world in terms of the academic subjects that led them to Harvard and then to the cushy chair in Washington. Bureaucrats have the luxury of being bad with money because it is easier for them to make money. These kinds of people don’t understand the practical needs of Americans. They are occupied with trying to turn every youngster into a philosopher-king.
There are two chances in life for education, first formally when nothing is at stake but your own time and attention, and secondly in the school of life where decisions have real outcomes. For as much as people will be hurt by the sub prime reality, the lesson of pain will ensure that others wake up and pay attention to their own future economic decisions. It’s the only hope for a better future, because the Department of Education isn’t changing for anyone.